How Does a Consumer Proposal Affect My Credit Rating?

Professionally Reviewed & Approved By:
A Licensed Insolvency Trustee

When you file a consumer proposal, you are telling your creditors you can no longer make the required payments on what you owe them. And, yes, filing a consumer proposal will affect your credit rating – but there’s more to the story.

If you file a consumer proposal, your credit score will be negatively affected, just as it would be if you simply ceased to make your payments. Filing a consumer proposal will typically result in an R7 rating for 6 years from the date the proposal is filed, or three years from the day the proposal is complete, whichever comes first.

However, keep in mind that if you’ve been experiencing financial stress, your credit score may already have been damaged by unpaid, late or delinquent accounts on your file. Before we explore how a consumer proposal affects the credit rating, let’s briefly examine the meaning of consumer proposal and how it works.

It is important to remember that filing a consumer proposal is a positive step, and the effect on your credit rating can be temporary.

Questions about consumer proposal? A Licensed Insolvency Trustee can answer your questions and help you explore your options. Contact a Trustee today for a free consultation.

What is a Consumer Proposal?

Definition of consumer proposal – It’s a negotiated debt settlement plan that offers consumers debt relief while avoiding bankruptcy.  In the vast majority of cases,a consumer proposal results in the unsecured creditors being paid a percentage of what is owed without interest. 

But how does a consumer proposal work in Canada? The repayments are typically scheduled on a monthly basis, over a period of up to 5 years. A Licensed Insolvency Trustee can help you negotiate the amount and other terms of repayment with your creditors in the most costefficient manner, after reviewing your income, assets, debts and other financial parameters. 

Since the payments are free of interest, consumer proposals in Canada can lead to considerable savings for the debtor while offering relief from many types of unsecured debt such as bank loans, credit card debts, payday loans, income tax debts, and some types of student loan debts. It would be worthwhile to note that mortgages and secured loans generally cannot be compromised by filing a  consumer proposal in Canada without resulting in foreclosure and/or seizure of the secured assets.

Why Consider Opting for a Consumer Proposal?

If you have the capacity to make partial payments towards your debts, opting for a consumer proposal is an advantageous option for a number of reasons. It not only helps you avoid bankruptcy but can also relieve you of a significant proportion of your debt without interest. In addition, it consolidates your debts into one reasonable and affordable monthly payment, the terms of which can be negotiated with the guidance of a federally Licensed Insolvency Trustee. Moreover, there is no loss of assets in a consumer proposal, so assets like home equity investments, and secondary motor vehicles can be retained while stopping collection calls and legal action from creditors. Proposals filed by Licensed Insolvency Trustees are the only debt settlement plans sanctioned by the Government of Canada. The Office of the Superintendent of Bankruptcy is the section of the Government of Canada that regulates the bankruptcy and consumer proposal processes in Canada. 

It is important to remember that filing a consumer proposal is a positive step, and the effect on your credit rating will be temporary. Questions about consumer proposal or how does a consumer proposal affect your credit score? A Licensed Insolvency Trustee can answer your questions and help you explore your options. Contact a Trustee today for a free consultation.

The Meaning of Credit Reports

On Canadian credit reports (from Equifax and TransUnion), each credit account is assigned a credit score on a scale from R1 to R9. R1 is the best credit rating and R9 is the worst. The “R” stands for revolving credit – accounts that can carry a running balance, on which you are required to pay only a portion each month.

Here are the credit score meanings:

  • R1 – You pay that credit account on time
  • R2 – Your payments are 30 days late
  • R3 – Your payments are 60 days late
  • R4 – Your payments are 90 days late
  • R5 – Your payments are 120 days late
  • R6 – (typically not used)
  • R7 – Typically used for consumer proposals, consolidation orders, or debt management plans (offered through a non-profit credit counsellor)
  • R8 – Shows that a secured creditor has taken steps to realize on their security (e.g. repossessed your car); rarely appears on a credit report as after repossession the creditor typically initiates legal or collection action, which is rated R9
  • R9 – Typically used when an account is placed for collection or considered un-collectible, or if you are bankrupt; R9 can also appear in consumer proposal

How Long Does a Consumer Proposal Stay on My Credit Report?

The Financial Consumer Agency of Canada states that Transunion and Equifax will remove the notation of a consumer proposal from your credit report three years after the proposal has been completed or six years from the proposal filing date, whichever is earlier.  In other words, the maximum length of time a consumer proposal will affect your credit report is 6 years. So, for example, if your consumer proposal takes you four years to pay off, your score will be affected for 6 years in total (as 6 years is less than 4 years plus 3 years).  In an alternative example, if you were to pay off your proposal in 2 years, your credit rating would be affected for a total of 5 years (2 years plus 3 years). As you can see, if you are able to pay off your proposal more quickly, your credit rating will improve in less time.

When you have completed your consumer proposal, your Trustee will mail you a “Certificate of Full Performance.” It is recommended that you send a copy of this document to TransUnion and Equifax along with a list of your debts included in the proposal, to make sure your credit record is updated as quickly as possible. They will process the new information as soon as they receive it.

It’s also necessary to maintain a copy of the Final Statement of Receipts and Disbursements, which includes a list of your creditors alongside the amounts that each received as a part of the debt settlement and key dates.

Mistakes on Credit Reports after Completion of a Consumer Proposal

Unfortunately, it is not uncommon to find mistakes on your credit report after you’ve completed the consumer proposal. It’s advisable to get the inaccuracies resolved as soon as you can, so your credit report reflects the correct and most updated picture. After all, upon completion of a consumer proposal, you’re looking forward to a fresh and optimistic start and rebuilding your credit. Both Equifax and Transunion have processes in place to correct erroneous information on your credit report in Canada. 

So be sure to examine your credit reports and check whether creditors are reporting any previously owed figures as fulfilled or still pending. If you find any discrepancies, you can initiate a rectification by submitting a correction request to Equifax or TransUnion (or whichever agency published the incorrect report). The request must include a completed Credit Investigation Request Form along with any pertaining documents as evidence to substantiate your request.

Is the Effect Of Consumer Proposal on My Credit, Permanent?

Although there is no way to shorten the length of time your proposal affects your credit rating, you can still improve your credit score significantly with careful use of new credit within 2-3 years after completion of your consumer proposal.

Tips for Credit Rebuilding

Ironically, the only way to fix your credit score is to start borrowing money again. If you are in a consumer proposal, think carefully about the purpose of this process, and how to avoid new problems with your credit. Even though it feels good to be offered new credit, or be accepted for a new card, be sure not to overextend your ability to make regular payments. Go slowly. You do not need to borrow large amounts to rebuild your credit. Making all your payments on time is the key.  In addition, pay attention to the interest rates and fees charged on credit products you apply for as there are some lenders who may not have your best interests in mind.

Here are some tips for rebuilding your credit.

#1 – Set up a budget

If you have filed a consumer proposal, your Trustee will have put together an income and expense statement with you and will discuss your budget with you as part of the financial counselling process. It is important to know how much you are spending. The key to budgeting is to set aside money for your fixed and variable costs every month. You should also set aside at least $1,000 for emergencies. Once you have this money put aside and your budget is working, you can begin credit rebuilding.

#2 – Establish Two or More New Lines Of Credit

There are two main types of credit available to consumers:

  • Revolving Credit. Revolving credit is credit that is constantly available to use, and includes credit cards, lines of credit, and store cards. Lenders typically update your payment history on these sources of credit every month.
  • Installment Credit. Installment credit is defined as a payment arrangement with a lender over a set period of time. This type of credit includes mortgages, car loans, chattel loans, and other types of loans. Unlike revolving credit, there is no capacity to borrow on demand, like there is with a revolving credit product.